Are Publishers Really Selling More on PS3 Than Xbox 360? No.

Last week, one of the biggest video-game publishers, Electronic Arts, reported quarterly results. In its reports, the company always gives a breakdown of revenue by gaming platform. Several enthusiast outlets, such as MCV, reported that EA’s revenue from PlayStation 3 games was bigger than that from Xbox 360 games. This would be unusual since the Xbox 360 installed base is substantially bigger than the PS3 installed base. In fact, Xbox 360 game sales continue to outpace those for PS3. Here’s why.

(Full disclosure: I work for Microsoft’s Xbox division and have no formal training in accounting or financial analysis. What follows is my understanding of the situation based on my 12 years as a business, technology and economics reporter for Reuters, and on recent informal conversations with financial analysts who cover the video game industry. This is also my personal opinion and does not reflect the view of my employer.)

Publishers report two sets of numbers in their quarterly reports: GAAP and non-GAAP. GAAP stands for Generally Accepted Accounting Principles, the set of rules that U.S. companies must follow when reporting financial information. The intent is to give investors and regulators a set of consistent, objective data that is comparable across companies and industries. But due to the circumstances of each industry, GAAP numbers often obscure, rather than illuminate, what is happening with an underlying business.

First, let’s look at EA’s GAAP revenue numbers for each platform (A side point: these are revenue or sales figures, not profits. Some reports have confused the two terms. Profit is what is left after a business deducts operational, marketing, administrative and other costs from its sales).

Wii: $161 million
PS3: $121 million
Xbox 360: $73 million

Sure enough, it looks like PS3 games are outselling Xbox 360 games. But here’s the twist. Because so many games now include a substantial online component that is maintained for several years, GAAP rules require a portion of revenue from the initial sale be booked over the life of the online service. So, in a purely hypothetical example, let’s say a $60 game is deemed to have half of its value come from online play. The company will then book $30 over a period of, say, two years, or $3.75 per quarter.

Game companies aren’t the only ones who do this. Apple does it with the iPhone because it delivers ongoing updates and services to the device. So of the $200 you pay for an iPhone, Apple records $25 of that each quarter for two years.

The thing is, this all happens purely on paper. In reality, EA gets that entire $60 all at once, and your $200 for an iPhone goes straight into Apple’s cash pile. Analysts pretty much ignore these GAAP numbers because they want to know what total unit sales were and what total revenue was. Indeed, here’s a line from The LA Times’ coverage: “Most Wall Street analysts say they pay attention to EA’s non-GAAP accounting as a measure of its financial performance.”

So let’s revisit EA’s numbers and look at the non-GAAP statement, which takes out the effects of the deferred online revenue.

Wii:  $184 million
PS3: $99 million
Xbox 360: $136 million

So non-GAAP, the number Wall Street actually cares about, shows Xbox 360 sales still leading PS3 sales. I’m guessing, speculating really, that given that Xbox 360 has the more robust and active online network, that EA is forced to record a larger chunk of deferred revenue, revenue that will be recorded over the next couple quarters.

Interestingly, Activision’s numbers are somewhat different. Here are the GAAP numbers:

Wii: $118 million
PS3: $152 million
Xbox 360: $231 million

And the non-GAAP, excluding the effect of deferred revenue:

Wii: $74 million
PS3: $105 million
Xbox 360: $140 million

Again, purely speculating here, I wonder if the GAAP is so much higher because Guitar Hero sales have been so high for a couple years, and now we are seeing a huge surge in deferred revenue from those past sales.

Anyone have any insights here?

Game reviews

Dubious Quality has some thoughts on whether game reviews are disproportionately favorable. He gathered some data on review scores from major sites like 1UP and GameSpot and finds that 50-60 percent were positive. He questions whether the games are really that good, with the subtext being that game review sites are under pressure to deliver positive reviews because they rely heavily on advertising from game companies. There’s no question that business concerns sometimes influence coverage, and industry insiders have gone on record many times confirming instances where that has happened.

However, there might be an additional factor that skews the results of such analysis. That is simply that the sample of games reviewed is probably not representative of all games out there. Take film. Ebert and most major newspapers don’t review all movies, they just review the handful their readers are most likely to be interested in this week.

By the same token, gaming sites review titles that that their readers are most likely to consider playing. Ebert doesn’t review direct-to-video “Little Mermaid 16: Ariel’s Facelift”, and most game sites don’t review “Lawnmower Tycoon” or “Diaper-changing Madness!”.
 
For example, there are supposed to be 1,000 games (retail and downloadable) out on Xbox 360 by the end of this year. If you figure that 200 games have yet to hit this year, there should be about 800 already out. Yet Metacritic only shows 449 reviews. Here’s the breakdown:
 
100-90: 14 games
89-80: 91 games
79-70: 123 games
69-60: 95 games
below 60: 122 games
 
If you take anything below 70 as unacceptable, then 48 percent of the game reviewed fall into that category. If you count 80 and above as where your gaming dollar is best spent, then 23 percent of games are worthy of your consideration. That suggests that as a whole, the industry-wide curve is more of what you’d expect — a very few GREAT games, a good selection of GOOD ones, a big band of MEDIOCRE ones, and a whole buttload of BAD ones.
 
Finally, I’d point out the obvious point that, as much as reviewers try to quantify their thinking with scores, it’s still an inherently subjective art. There are games I enjoyed immensely that only scored in the mid-70s on Metacritic, and there are some that won universal praise and high scores that I just didn’t get. Same with movies.
 
In the end, I wonder if we’ll see some sort of shakeout in the review industry where a handful of guys and gals elevate to become the Roger Eberts of the medium. I don’t agree with everything Ebert says, but he’s a consistent enough personality that you can read his reviews and decide for yourself whether or not you’d like a movie, regardless of the direction his thumb is pointing.

Pros and cons

A couple quick observations about living a post-journalistic life. 

First, it’s weird being cut off from the firehose of news that Reuters reporters drink from in the newsroom. Not only are CNN and CNBC playing, but press releases pop up in constantly, you have real-time stock prices, and you see the latest headlines — lit up in red caps — constantly scroll down your screen.

As much as the Web has done for spreading news more broadly and giving people quicker access, relying on even aggregator sites like Google News or Yahoo News for the latest breaking story is like viewing the world through one of those fisheye security peepholes.

A couple of examples. When Apple last reported earnings, I checked Yahoo News 15 minutes after they reported and all that was up were short stories of a couple paragraphs. I know that for a major company like Apple, Reuters would put out 15-20 headlines, have five paragraphs out in five minutes, followed by a 6-8 paragraph update 10 minutes later.

The other example was the Olympics. At Reuters, I could sit at my desk, punch in “OLYMPICS”, hit F9 and have every Olympic story instantly pop up. That’s for every sporting event, every political story, every color story, any story that had an OLYMPICS tag on it. NBC’s official Olympics Web site got lots of praise for its breadth and depth of coverage, but it couldn’t hold a candle next to the comprehensive file any reporter with a wire terminal has at his fingertips.

On the plus side, I came to realize a couple weeks ago that my evenings and weekends are completely mine. I’m not expected to know what Apple, or Sony, or EA is up to on a Saturday night, or any night. For the first time in 12 years, I have a clear separation between work life and home life. As a reporter, your job doesn’t entirely end when you leave the newsroom. You always have to be ready for the late-night call from an editor or overnight staffer saying that something on your beat has just happened.

In China it could be even more nerve-wracking because we’d take turns at weekend and evening duty and you’d never know what would happen — the central bank could raise interest rates, an earthquake 1,500 miles away could kill 10,000 people, a high-ranking official could be brought down on corruption charges.

Not to say I don’t ever work evenings or weekends, but it’s for stuff you know is coming down the road, crunch periods with long lead times, like E3.

It’s something I think I can get used to.

“GTA4″ reviews start rolling in

The early reviews of Grand Theft Auto IV are trickling in, and all indications are that not only did Rockstar hit a home run, they knocked the freakin’ ball into orbit.

Metacritic so far has the Xbox 360 version scoring a perfect 100 based on 13 reviews. If that holds, it will finally knock BioShock (which “only” scored a 96) to second place. I’m not quite sure how Metacritic is getting the perfect 100 since two reviews gave GTA4 a 98 and one came through with a mere 95. It proabably has to do with Marc Doyle’s weighted system that has the views of more influential outlets count for more.

I will say that the circumstances surrounding the reviews are certainly odd. Typically, embargoed reviews are lifted all at the same time. Such was the case with Halo 3, the game that probably most parallels GTA4 in terms of hype and gamer reaction.

But Rockstar seems to have assigned staggered embargo times for various outlets. IGN was the first out of the gate with its “exclusive review” earlier this weekend. Kotaku told readers it would post its review at 9am Pacific on Sunday, and stuck to that (posting an hour later, even) despite that IGN’s piece was already out. Tonight I see GameSpy, but not GameSpot, has a review out, and The New York Times has its review.

Variety’s Ben Fritz calls the ethics of the whole enterprise into question. While I’ll leave that topic to in-person discussions over a mug or two of beer, I will echo his sentiment that if someone else is already running with news you have agreed to hold until a later time, then any embargo is effectively broken and you should be clear to run your story. In most cases this does require a phone call to be placed to the source of the news, first to ask about the circumstances of the early report, and second as a courtesy to inform them that you now plan to run your story. The only situation I can envision in which you might hold back is if the terms of the embargo you agreed to explicitly stated that other outlets may be running reviews earlier than you, but you must hold yours until the agreed-upon time anyway. 

The other major implication of all these positive reviews is that I may be compelled to go to my local GameStop tomorrow at midnight to procure my copy. I am seriously contemplating buying it, coming home, and playing it for 7 hours or so until I have to get back to the office. Grand Theft Auto? More like Grand Theft Good Night’s Rest.